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Globalization, Taxes& Inequality
Gabriel Zucman (UC Berkeley)
CopenhagenJune 13th, 2019
Introduction
Globalization has created new ways to avoid taxes:
. Multinational firms shift profits to low-tax places
. Countries compete by cutting their tax rates
. Wealthy households can move assets to tax havens
How does this tax avoidance redistribute income betweennations and between social groups?
→ Key question to think about about the economic andpolitical sustainability of globalization
This talk is based on 4 papers
. “The Missing Profits of Nations” (w. Tørsløv, Wier)
. “The Exorbitant Tax Privilege” (w. Wright)
. “Tax Evasion & Inequality” (w. Alstadsæter,Johannesen)
. “Global Wealth Inequality”
Two goals of this research agenda:
. Positive macro-distributional analysis ofglobalization (data: http://gabriel-zucman.eu)
. Design policies to make globalization more sustainable
The Missing Profits of Nations
How much profits move across countries because ofdifferences in corporate tax rates?
. Firms move capital to low-tax countries
. Firms shift paper profits to tax havens
If there was a perfect international tax coordination:
. Which countries would gain/lose profits?
. How? Relocation of capital, or reduced profit shifting?
How we estimate the amount of profitsshifted to tax havens
We compute capital shares α in foreign vs. localfirms across the world. Striking global pattern:
. Foreign firms have lower α than local firms...
. ... Except in tax havens: hugely higher α
Benchmark estimate: set profitability of foreign firms inhavens equal to profitability of local firms in havens
. Transparent
. Robust
In non-havens, foreign firms are lessprofitable than local firms
0%
10%
20%
30%
40%
50%
60%
German
y Ita
ly
United
King
dom
Spain
Japan
Austra
lia
United
State
s
France
Pre-tax corporate profits (% of compensation of employees)
Foreign firms Local firms
Average: 36%
In tax havens, foreign firms are muchmore profitable than local firms
1675%
0%
200%
400%
600%
800%
Puerto
Rico
Irelan
d
Luxem
bourg
Switz
erlan
d
Singa
pore
Hong K
ong
Netherl
ands
Belgium
United
State
s
Austra
lia
United
King
dom
Spain
Japan
France
German
y Ita
ly
Pre-tax corporate profits (% of compensation of employees)
Foreign firms
Local firms
Main results
40% of multinat’l profits (≈ $600bn) shifted to havens
. Main winners: Ireland, Luxembourg, Singapore, etc.(impose low rates but on big $600bn base)
. Main losers: non-haven EU countries
. Profit shifting swamps tax-driven tangible capitalmobility (different welfare implications)
. Rise of capital share is higher than in official data →provide corrected estimates of α, GDP, trade
Why should we care?
Whatever one’s view about efficiency costs of capitaltaxation, global profit shifting raises policy issues:
. Distorted competition
. Inequality
. Loss of tax revenue
To study who loses profits, follow themoney in balances of payments of havens
-80% -60% -40% -20% 0% 20% 40% 60% 80% 100%
Luxembourg
Ireland
Puerto Rico
Singapore
Netherlands
Germany
Belgium
Italy
Spain
Japan
France
Canada
Australia
United States
Current account balance (% of national income)
Net trade surplus
Net intra-group interest received
Net intra-group profits received
Who loses most? The EU.
0%
5%
10%
15%
20%
25%
30%
35%
40%
EU US Developing countries Rest of OECD
% o
f to
tal p
rofit
s sh
ifted
to ta
x ha
vens
Where do the shifted profits come from?
Who loses most? The EU.Who shifts most? The US.
0%
10%
20%
30%
40%
50%
EU US Developing countries Rest of OECD
% o
f to
tal p
rofit
s sh
ifted
to ta
x ha
vens
Allocating the profits shifted to tax havens
Where the shifted profits come from
To whom the shifted profits accrue
Who loses most? The EU.Who shifts most? The US.
Profit Shifting by
U.S. Multinationals
The Exorbitant Tax Privilege
Study profits, wage, capital, rates of returns, and taxes ofUS multinationals back to 1966
Key source: BEA survey of activities of US multinat’l
. Annual since 1982, every 5 years back to 1966
Supplement with IRS tabulations (form 5471)
. Main advantage: annual back to early 1960s
→ First long-run series on effective tax rate paid byUS firms on their foreign operations
Where do US multinationals operate?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
% o
f tot
al (h
aven
+ n
on-h
aven
affi
liate
s)
Affiliates in non-havens
Affiliates in havens
Wages
Wages
Wages
Wages
Where do US multinationals operate?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
% o
f tot
al (h
aven
+ n
on-h
aven
affi
liate
s)
Affiliates in non-havens
Affiliates in tax havens
Wages
Tangible capital
Wages
Tangible capital
Where do US multinationals book theirprofits?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
% o
f tot
al (h
aven
+ n
on-h
aven
affi
liate
s)
Affiliates in non-havens
Affiliates in tax havens
Pre-tax profits
Wages
Tangible capital
Pre-tax profits
Wages
Tangible capital
Where do US multinationals produceintangibles?
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
% o
f tot
al (h
aven
+ n
on-h
aven
affi
liate
s)
Affiliates in non-havens
Affiliates in tax havens
Pre-tax profits
Wages
Tangible capital
Pre-tax profits
Wages
Tangible capital
Employees engaged in R&D
Employees engaged in R&D
In 2016: 50% of profits in havens (taxedat 7%), 50% elsewhere (taxed at 27%)
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
0% 10% 20% 30% 40% 50% 60% 70%
Pre
-tax
prof
its /
wag
e pa
id
Taxes paid / pre-tax profits
Where do US multinationals book their profits? (majority-owned affiliates of US multinationals, 2016)
Ireland
Bermuda & Caribbean
France
Brazil
China
Singapore
Netherl.
Switzerland
Bel. Germany India
Japan
UK
Mex. Ita.
Half of all the foreign profits of US multinationals were booked in these tax havens in 2016
Why do US multinationals shift so muchprofits to tax havens?
Perceived national interest of the US: good to let USmultinationals shift out of foreign high-tax countries
. Until 2017, US taxed worldwide profits, with creditsgiven for foreign taxes paid
. If foreign profits booked in 0 tax places: no creditsgiven → more tax revenue in US upon repatriation
. 1996: US Treasury facilitates shifting to tax havens(check-the-box regulations) 6= other countries
Did profit shifting enhance US taxcollection?
It did not:
. Haven profits perpetually retained → avoided U.S. tax
. Rising untaxed profits → rising lobbying for amnesty
. 2017 law: mandatory one-time tax at low rate (<8%)of past untaxed profits
→ Very low effective tax rate on foreign operationsof US multinationals
Total tax rate on foreign profits, includingeffect of 2017 mandatory repatriation
0%
10%
20%
30%
40%
50%
60%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Tax rate paid by U.S. multinationals on foreign profits (All sectors excluding oil)
Rate including U.S. amnesty
Statutory U.S. rate
Rate paid to foreign countries
The redistributive effects of profit shifting
1) Redistribution across income groups:
. Rise of global after-tax profits ↗ income forshareholders
. Ongoing work (with C. Gaubert & W. Sandholtz) toestimate how much various income/wealth groupsgain/lose in each country
2) International redistribution of tax revenues:
. For small countries, revenue-max. rate 0 < τ ∗ <5%:havens with τ ≈ τ ∗ generate very large tax revenue
. Can explain the rise of the supply of tax avoidanceschemes (e.g., tax rulings: Apple – Ireland)
Many havens collect a lot of taxrevenue...
0%
1%
2%
3%
4%
5%
6%
7%
8%
Malt
a
Luxem
bourg
Hong K
ong
Cypru
s
Japan
Austra
lia
Irelan
d
Switz
erlan
d
Canad
a
Belgium
Korea
Singa
pore
Mex
ico
United
King
dom
Netherl
ands
France
Puerto
Rico
Spain
German
y
United
State
s Ita
ly
Polan
d
Corporate income tax revenue (% of national income)
Average among non-havens: 3.5%
... By applying low rates to the huge taxbase they attract
0%
20%
40%
60%
80%
100%
Malt
a
Puerto
Rico
Irelan
d
Luxem
bourg
Cypru
s
Hong K
ong
Singa
pore
Netherl
ands
Switz
erlan
d
Corporate tax revenue collected & tax rate on shifted profits
Revenue collected on shifted profits, % of total revenue
Tax rate on shifted profits
As profit shifting rose...
0%
50%
100%
150%
200%
250%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Pre-tax corporate profits (% of compensation of employees)
Ireland
United States
...Tax revenue rose in many havens, whilethey ↓ or stagnated in high-tax countries
0%
1%
2%
3%
4%
5%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Corporate income tax revenue (% net national income)
Ireland
United States
The lower the rate, the higher the revenue
0
10
20
30
40
50
0%
1%
2%
3%
4%
5%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Corporate income tax revenue vs. tax rate in Ireland
Tax revenue (left) (% of national income) Nominal tax rate (right)
Tax Evasion in a Globalized World:Evidence from Leaks
Tax Evasion and Inequality
Anecdotal evidence that wealthy conceal assets abroad(UBS, Credit Suisse, Panama Papers, ...)
. How important is this form of tax evasion?
. How concentrated is it?
. How does it change what we know about inequality?
We analyze new data capturing evasionby the wealthy
Massive leaks from HSBC Switzerland andMossack Fonseca (“Panama Papers”)
. Leaks random & from big offshore wealth managers
. Match to tax records in Norway, Sweden, Denmark(ongoing work in US with D. Reck et al.)
. Combine with macro stats on wealth hidden in havens
Two key findings:
. Offshore evasion very concentrated
. At the top, way larger than evasion detected inrandom audits
The HSBC leak
Key strengths:
. Large bank (among top 10 Swiss banks)
. Representative
. Recorded identity of beneficial owners
. Clear-cut way to identify evasion
The proba to have an unreported HSBCaccount rises sharply within the top 1%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
P90-P95 [0.6 – 0.9]
P95-P99 [0.9 – 2.0]
P99-P99.5 [2.0 – 3.0]
P99.5-P99.9 [3.0 – 9.1]
P99.9-P99.95 [9.1 – 14.6]
P99.95-P99.99 [14.6 – 44.5]
Top 0.01% [> 44.5]
Net wealth group [millions of US$]
Probability to own an unreported HSBC account, by wealth group (HSBC leak)
HSBC evaders hide close to half of theirwealth at HSBC
0%
10%
20%
30%
40%
50%
P90-P95 [0.6 – 0.9]
P95-P99 [0.9 – 2.0]
P99-P99.5 [2.0 – 3.0]
P99.5-P99.9 [3.0 – 9.1]
P99.9-P99.95 [9.1 – 14.6]
P99.95-P99.99 [14.6 – 44.5]
Top 0.01% [> 44.5]
Net wealth group [millions of US$]
Average wealth hidden at HSBC, by wealth group (%oftotalwealth(includingheldatHSBC))
Other samples
Panama Papers:
. Another large intermediary
. But not possible (yet) to identify evasion v avoidance
Amnesty participants:
. Big samples (1,422 hholds Norway; 6,811 Sweden)
. Tax evasion by definition involved
. But self-selection
The Panama Papers confirm that the useof tax havens rises sharply with wealth
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
P90-P95 [0.6 – 0.8]
P95-P99 [0.8 – 1.8]
P99-P99.5 [1.8 – 2.7]
P99.5-P99.9 [2.7 – 8.1]
P99.9-P99.95 [8.1 – 13.3]
P99.95-P99.99 [13.3 – 41.4]
Top 0.01% [> 41.4]
Net wealth group [millions of US$]
Probability to appear in the "Panama Papers", by wealth group (Shareholders of shell companies created by Mossack Fonseca)
Amnesty data show widespread evasion atthe top
0%
2%
4%
6%
8%
10%
12%
14%
P90-P95 [0.6 – 0.8]
P95-P99 [0.8 – 1.8]
P99-P99.5 [1.8 – 2.7]
P99.5-P99.9 [2.7 – 8.1]
P99.9-P99.95 [8.1 – 13.3]
P99.95-P99.99 [13.3 – 41.4]
Top 0.01% [> 41.4]
Net wealth group [millions of US$]
Probability to voluntarily disclose hidden wealth, by wealth group (Swedish and Norwegian tax amnesties)
Hidden wealth is extremely concentrated
0%
10%
20%
30%
40%
50%
60%
P0-50 P50-P90 P90-P99 P99-P99.9 P99.9-99.99 P.99.99-P100
% o
f tot
al re
cord
ed o
r hid
den
wea
lth
Position in the wealth distribution
Distribution of wealth: recorded vs. hidden
Hidden wealth disclosed in amnesty
Hidden wealth held at HSBC
All recorded wealth
Estimating tax evasion through offshoreintermediaries
Five steps:
. Macro stock of offshore wealth
. What fraction hidden v declared
. Distribute like in HSBC and amnesties
. Apply rate of return
. Use tax simulator to estimate evaded tax
Offshore tax evasion vs. tax evasiondetected in random audits
0%
5%
10%
15%
20%
25%
30% P
0-10
P10
-20
P20
-30
P30
-40
P40
-50
P50
-60
P60
-70
P70
-80
P80
-90
P90
-95
P95
-99
P99
-99.
5
P99
.5-9
9.9
P99
.9-P
99.9
5
P99
.95-
P99
.99
P99
.99-
P10
0
% o
f tax
es o
wed
that
are
not
pai
d
Position in the wealth distribution
Taxes evaded, % of taxes owed
Offshore evasion (leaks)
Tax evasion other than offshore (random audits)
Factoring in offshore wealth is importantto measure inequality at the top
0%
2%
4%
6%
8%
10%
12%
Spain UK Scandinavia France USA Russia
% o
f tot
al h
ouse
hold
wea
lth
The top 0.01% wealth share and its composition
Offshore wealth
All wealth excluding offshore
Conclusion
The redistributive effects of globalization
Much attention has been paid to redistributive effects ofinternational trade:
. Large academic literature
. Major effort to coordinate trade policies post-WW2
Less attention has been paid to challenges raisedby tax competition, profit shifting, financial opacity:
. Major redistribution of revenue both across countriesand social groups
. Need to design policies to address these challenges
Supplementary slides
Only 17% of multinationals’ profits arevisible in financial accounts micro-data
Note: This graph shows the imperfect coverage in Orbis. For each multinational firm we take the sum of profits made by all subsidiaries registered in Orbis and divide by the global profits of the same multinal firm. Whenever the share is lower than 1 this means that we only see part of the global profits in Orbis. .
Weighted average = 0.172
0.1
.2.3
0 .2 .4 .6 .8 1Share of profits found in 2012
Fraction of firms
Weighted average: 0.17
Share of global profits found in 2012
The missing profits in Orbis
0% 20% 40% 60% 80% 100%
30%
20%
10%
0%
Weighted average: 17%
A new global database on profits (2015)
Billions of current US$
% of net corporate
profitsGlobal gross output (GDP) 75,038
Depreciation 11,940
Net output 63,098
Net corporate output 34,083 296%
Net corporate profits 11,515 100%
Net profits of foreign-controlled corp. 1,703 15%
Of which: shifted to tax havens 616 5%
Net profits of local corporations 9,812 85%
Corporate income taxes paid 2,154 19%
Imputation of profits in foreign firmswhen no FATS exist
Compute profits in foreign firms using direct investmentincome flows
. 10% vs. 50% ownership threshold; pre-tax vs.post-tax → impute taxes
. Assume profits / wage same as for US affiliates
Imputation when no direct investment income data exist:
. Estimate direct investment income paid such thatworld DI income balances to 0
. Two reasons why global DI income > 0: missing USprofits in Ireland etc.; missing BoP → we impute both
back
Shifted profits: robustness
πl in havens inflated by inward shifting?
. Robustness test: vary πl → little difference
Foreign firms different than local firms?
. Sectoral composition → find πf >> πl within sector
. Capital intensity → decompose πf into shifting effectsvs. movements of capital
Estimated profits shifted in each haven
Reported pre-tax profits
Of which: Local firms
Of which: Foreign firms
Shifted profits
Belgium 80 48 32 -13Ireland 174 58 116 -106Luxembourg 91 40 51 -47Malta 14 1 13 -12Netherlands 195 106 89 -57Caribbean 102 4 98 -97Bermuda 25 1 25 -24Singapore 120 30 90 -70Puerto Rico 53 10 43 -42Hong Kong 95 45 50 -39Switzerland 95 35 60 -58Other -51
Tax haven firms are abnormally profitablewithin each sector
0%
100%
200%
300%
400%
500%
600%
700%
800%
Chemical Computers Wholesale trade
Information Finance Professional services
Other
Pre-tax corporate profits (% of compensation of employees) (Foreign affiliates of US multinationals, 2015)
Tax havens
Non havens
The huge profits of foreign firms maketax havens abnormally profitable overall
0%
50%
100%
150%
200%
250%
300%
Luxem
bourg
Irelan
d
Puerto
Rico
Singa
pore
Hong K
ong
Netherl
ands
Belgium
German
y Ita
ly
United
King
dom
Japan
Spain
Austra
lia
United
State
s
Switz
erlan
d
Canad
a
France
Pre-tax corporate profits (% of compensation of employees )
Average among non-havens: 36%
Anomalies in the world balance ofpayments
-400
-200
0
200
400
600
800
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Bill
ions
of
curr
ent U
.S. d
olla
rs
The world current account discrepancies
Direct investment income balance (missing income of US affiliates; Caribbean)
Portfolio & other income balance (offshore household wealth)
Trade balance (missing service imports from tax havens; missing goods imports in China)
The unrecorded profits of U.S. affiliates intax havens
0%
50%
100%
150%
200%
250%
300%
Luxem
bourg
Irelan
d
Puerto
Rico
Singa
pore
Hong K
ong
Netherl
ands
Belgium
German
y Ita
ly
United
King
dom
Japan
Spain
Austra
lia
United
State
s
Switz
erlan
d
Canad
a
France
Pre-tax corporate profits (% of compensation of employees )
Missing profits of other multinationals
Missing profits of U.S. multinationals
As reported in the national accounts
Average among non-havens: 36%
Tax haven affiliates of U.S. multinationalsare abnormally profitable
0%
100%
200%
300%
400%
500%
600%
700%
800%
Irelan
d
Bermud
a & C
ar.
Luxem
bourg
Switz
erlan
d
Singa
pore
Netherl
ands
China
Japan
Mex
ico
Belgium
Canad
a In
dia
United
King
dom
Italy
German
y
France
Brazil
Pre-tax profits of affiliates of U.S. multinationals in 2015 (% of compensation of employees)
Average among non-haven affiliates: 49%
Tax haven affiliates of US multinationalsare abnormally profitable
0%
50%
100%
150%
200%
250%
300%
350%
1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Pre-tax profits of affiliates of U.S. multinationals (% of compensation of employees)
Tax haven affiliates
Non-haven affiliates
Decomposing the abnormally highprofitability of U.S. affiliates
0%
100%
200%
300%
400%
500%
1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
The profitability π of the affiliates of US multinationals (ratio of Haven affiliates / Non-haven affiliates)
Physical capital / wage (K/wL)
Operating surplus / physical capital (r)
Net interest received (1-p)
π = (K/wL).r.(1-p)
Corporate tax revenue losses
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
EU US Developing countries Rest of OECD
Tax revenue lost due to profit shifting (% of corporate tax revenue collected)
Global average: 10%
Service imports from tax havens areunder-estimated by importers (B2C sales)
-
10
20
30
40
50
60
70
Luxembourg Ireland Belgium Netherlands Malta Cyprus
€ Bn. The missing service exports of the six EU tax havens
Exports to EU22 recorded by exporter
Imports recorded by EU22
At least 30% of the services exported byEU havens go unreported by the importer
-10%
0%
10%
20%
30%
40%
50%
60%
EU22 EU6 Luxembourg Ireland Belgium Netherlands Malta Cyprus
Missing service exports, % of total service exports
Note: Service exports include exports to all EU22 countries (EU26 minus Luxembourg, Ireland, Belgium, Netherlands, Malta, Cyprus).
Explaining the rise of
profit shifting
Beggar-thy-neighbor pays off
Incentives of havens can explain the rise of shifting:
. With source taxation & no coordinato or sanction,havens can earn revenue by attracting paper profits
. For small countries, revenue-max. rate 0 < τ ∗ <5%:havens with τ ≈ τ ∗ generate very large tax revenue
. Can explain the rise of the supply of tax avoidanceschemes (e.g., tax rulings: Apple – Ireland)
Explaining the persistence of
profit shifting
The policy failure of high-tax countries
Why haven’t high-tax countries protected their base?
Our explanation: failure of tax enforcement
. In current international tax system, tax authoritieshave perverse incentives
. Higher expected gain of relocating base booked inother high-tax countries than base shifted to havens
. Rational outcome: chase profits booked in otherhigh-tax countries, not those shifted to havens
The incentive problem of tax authorities
e1 re-located to Denmark is worth the same to Denmarkwhether it comes from Germany or Bermuda
But much easier to relocate e1 booked in Germany:
. Feasible: information exists (Orbis)
. More likely to succeed: no push-back from firms
. Quick: cooperation via dispute settlement agreements
Crowds out enforcement on havens: hard (no data), costly(legal defense by firms), lengthy (lack of cooperation)
Most transfer price enforcement is againstother high-tax countries
0%
10%
20%
30%
40%
50%
60%
70%
Non tax havens Tax havens Counterpart unknown
Pct. of total
Distribution of Danish transfer price corrections (value)
Non-EU
EU
Note: The graph plots the distribution of the value of transfer price corrections by counterpart. Transfer price corrections are cases in which the Danish tax authority have corrected an intra-group cross-border transfer price and as a result raised the taxable profits of firms operating in Denmark. The counterpart is the country that the Danish tax authority argue have received excessive taxable profits. The graph shows that 65% of the value of transfer pricing corrections concerns a high tax country (Non tax haven).
Most transfer price enforcement is againstother high-tax countries
0
2
4
6
8
10
12
14
Uni
ted
Stat
es
Ger
man
y
Switz
erla
nd
Net
herla
nds
Japa
n
UK
Fran
ce
Kor
ea
Aus
tral
ia
Aus
tria
Nor
way
Chi
na
Cay
man
I.
Sing
apor
e
Den
mar
k
Can
ada
Cze
ch
Taiw
an
Finl
and
Pola
nd
BV
I
Hon
g K
ong
Pana
ma
Swed
en
Bar
bado
s
# of times country is among top 3 targets
Countries most often targeted in transfer price disputes
Can more cooperation and betterinformation solve the problem?
Facilitating dispute settlement can backfire:
. Ongoing initiative to ↑ cooperation within OECD
. Problem: crowds out enforcement on non-OECDhavens, where bulk of shifting takes place
Better information can help, but not enough:
. Even with perfect info, firms will always fight more toprotect profits they book in low-tax places
. Internalizing this, tax authorities will keep going afterhigh-tax places
Even when tax havens cooperate,tax authorities do not target them
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
EU high tax country EU tax haven
% of total Counterpart in Mutual Agreement Procedures in the EU
As settlement is facilitated, high-tax tohigh-tax disputes are growing
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Number of cases Number of mutual agreement procedures in the OECD
Inventory of mutual agreement procedures
New mutual agreement procedures
Multinationals outspend tax authorities
2.4
231.9
0
50
100
150
200
250
Government Private
1000' employees Governments vs. corporate transfer pricing specialists
Source is LinkedIn, but the government count is corroborated by the EY Transfer Pricing Tax Authority Survey (2014). The wage bill is estimated by applying the average salary of an EY Transfer Pricing Specialist (Source: Glassdoor).
Wage bill ≈ €15 Billion
Implications of profit shifting for the US“exorbitant privilege”
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
The net foreign assets and income of the United States (% of U.S. national income)
Net assets (left)
Net income (right)
Explaining the income puzzle
Striking direct investment yield differential:
. 1966–2016 after-tax yield on US direct equityinvestment abroad: 9.1%
. Foreign direct equity investment in US: 4.6%
Why are U.S. multinationals so profitable?
. Standard explanato: bc they are older, take more risks
. Our explanation: because pay little foreign taxes
. Can explain about half of the U.S. yield differential
Taxes levied by oil producers vary a lotover time and fell after the first Gulf War
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Foreign tax rate of US multinationals on foreign profits (Oil sector)
First gulf war
70%
45%
As foreign tax rates fell, after-taxprofitability in the oil sector surged
0%
200%
400%
600%
800%
1000%
1200%
1400%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Profits of foreign affiliates of US oil multinationals (% of compensation of employees paid)
Post-tax
Pre-tax
Taxes
Explaining the yield differential on USdirect investment
. Tax avoidance by US multinationals: 30%
. Key role of 1996 check-the-box regulations
. Low taxes levied by oil-producing states: 20%
. Return on military protection granted by US tooil-producing states?
. Tax competition among oil producing countries?
→ Key role of policies and geopolitics in explaining“exorbitant privilege” of the US
Main result: tax evasion is small overallbut high at the top
0%
10%
20%
30%
P0-
10
P10
-20
P20
-30
P30
-40
P40
-50
P50
-60
P60
-70
P70
-80
P80
-90
P90
-95
P95
-99
P99
-99.
5
P99
.5-9
9.9
P99
.9-P
99.9
5
P99
.95-
P99
.99
P99
.99-
P10
0
% o
f tax
es o
wed
Position in the wealth distribution
Taxes evaded, % of taxes owed (stratified random audits + leaks)
Average: 2.8%
HSBC vs. other Swiss banks
UAEArgentBelgiu
Brazil
Canada
German
EgyptSpain
UK
GreeceIndia
Israel
Italy
MexicoRussia
Saudi
Turkey
USA
Venezu
DenmarNorway
Sweden
0.0
2.0
4.0
6.0
8.1
Shar
e of
HSB
C w
ealth
0 .02 .04 .06 .08 .1Share of wealth in all Swiss banks
Data source: ICIJ and SNB.Note: In the full sample excluding tax havens (134 countries), a regression of the share of HSBCwealth on the share of Swiss deposits has slope b= 0.90 (se = 0.04) and R-square of 0.75.
HSBC wealth vs. wealth in all Swiss banks
Tax evasion detected in random audits
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0% P
0-10
P10
-20
P20
-30
P30
-40
P40
-50
P50
-60
P60
-70
P70
-80
P80
-90
P90
-95
P95
-99
P99
-99.
5
P99
.5-1
00
% o
f tax
es o
wed
that
are
not
pai
d
Position in the wealth distribution
Taxes evaded, % of taxes owed (stratified random audits)
Macro average: 2.3%
Random audits detect a lot of errors ontax returns
0%
10%
20%
30%
40%
P0-
10
P10
-20
P20
-30
P30
-40
P40
-50
P50
-60
P60
-70
P70
-80
P80
-90
P90
-95
P95
-99
P99
-99.
5
P99
.5-1
00
Position in the wealth distribution
Fraction of households evading taxes, by wealth group (stratified random audits)
But random audits fail to capturesophisticated evasion at the top
0%
5%
10%
15%
20%
25%
30% P
0-10
P10
-20
P20
-30
P30
-40
P40
-50
P50
-60
P60
-70
P70
-80
P80
-90
P90
-95
P95
-99
P99
-99.
5
P99
.5-1
00
% o
f tot
al in
com
e (r
epor
ted
+ ev
aded
)
Position in the wealth distribution
Fraction of income undeclared, conditional on evading (stratified random audits)
Accounting for hidden wealth increasestop wealth shares substantially
0%
2%
4%
6%
8%
10%
12%
14%
1930 1940 1950 1960 1970 1980 1990 2000 2010
Top 0.1% wealth share in Norway
Excluding hidden wealth
Including hidden wealth
Tax evasion on hidden wealth: bounds
0%
10%
20%
30%
40%
50%
P90
-95
P95
-99
P99
-99.
5
P99
.5-9
9.9
P99
.9-P
99.9
5
P99
.95-
P99
.99
P99
.99-
P10
0
% o
f tot
al ta
xes
owed
that
are
not
pai
d
Position in the wealth distribution
Offshore tax evasion, by wealth group
Lower-bound scenario
High scenario
On aggregate, Scandinavian countriesown relatively little offshore wealth
0%
10%
20%
30%
40%
50%
60%
70%
Kor
ea
Pol
and
Chi
na
Den
mar
k Fi
nlan
d Ja
pan
Indi
a N
orw
ay
Indo
nesi
a C
anad
a Ira
n S
wed
en
Net
herla
nds
Bra
zil
Aus
tralia
M
exic
o U
SA
Aus
tria
Thai
land
C
olom
bia
Irela
nd
Spa
in
Sou
th A
frica
Ita
ly
Fran
ce
Ger
man
y U
K
Bel
gium
Tu
rkey
P
ortu
gal
Taiw
an
Gre
ece
Arg
entin
a R
ussi
a S
audi
Ara
bia
Vene
zuel
a U
AE
Offshore wealth / GDP (All countries with GDP > $200 billion in 2007)
World average: 9.8%